Small-caps funds present an opportunity to gain from the growth of smaller and growing companies in India. But it comes with a higher risk. What could counter that is some pre-investment considerations. Read on to find out more about small cap mutual funds.
Understand your risk appetite
Small-cap funds are high-risk, high-return investments as they invest in small companies that are more volatile. Before investing in small-cap funds, assess your risk tolerance and ensure you can withstand capital losses from such highly volatile funds. Only invest money that you do not need in the short term. Use a small-cap fund calculator to estimate potential gains and losses based on different holding periods and market situations.
Check the fund’s performance and portfolio
Study the performance of different small-cap funds over 3 to 5 years to choose a top-performing fund. Look at measures like annual returns, rolling returns and risk-adjusted returns. Review the fund’s portfolio to see the sectors and companies it invests in. Choose a fund with a concentrated portfolio of promising small companies that can become leaders over the long run. A fund with companies in industries showing strong growth potential is a good choice.
Analyze the fund manager’s profile
The expertise and experience of the fund manager have a significant impact on the performance of a small-cap mutual fund. Prefer a fund that has been managed by the same fund manager for at least 3 to 5 years showing a consistent track record of strong risk-adjusted performance. The best mutual funds have managers that have proven experience in selecting winning small companies with the potential for high growth.
Invest for the long haul
Do not invest in small-cap funds for short-term needs or immediate gains. They are meant for investment horizons of at least 7 to 10 years to realize solid returns and also ride out interim volatility. Use a small-cap fund calculator to see how staying invested for longer periods can boost your gains, despite ups and downs. Over long periods, small-cap funds have the potential to deliver annual returns of around 15-20% that can help achieve your financial goals.
Start an SIP for regular investing
A Systematic Investment Plan or an SIP allows you to invest a fixed amount in small-cap mutual funds regularly, which helps benefit from rupee cost averaging. Investing at market lows through an SIP accumulates more units, which can gain higher returns when markets recover. An SIP also inculcates discipline and helps avoid the temptation to time the market. Use a small-cap fund calculator to assess different SIP amounts and periods to accumulate wealth over the long run.
Doing adequate research and planning are prerequisites to smart investing in volatile small-cap funds. Assess your risk tolerance, analyze fund performance and managers, stay invested for the long term and start SIPs for the best results. Use a small-cap fund calculator to estimate how these considerations can work to your advantage over time.